All Roads Lead to Carlyle

The firm’s acquisition of AlpInvest will transform the most omnipresent private investor in the world into one of the most important backers of other people’s funds.

This morning something was confirmed that the market had been suspecting for months: The Carlyle Group is getting into the limited-partner business.

The firm, already one of the largest private direct investors in the world, will acquire Holland’s AlpInvest, which is one of the largest indirect private investors in the world. The deal turns a behemoth into a juggernaut.

This is a transformational move for a firm that has already helped transform what was originally an obscure market populated by small “LBO shops” into a seriously large industry. One of the key attributes of all major industries is the dominance of a handful of players at the top. Carlyle is among the alpha dogs of alternative investments, and its influence is about to grow further.

With AlpInvest under the Carlyle umbrella (and although there will be a “firewall” between the two divisions), the combined firm will commitment capital to hundreds of non-Carlyle private funds through AlpInvest funds-of-funds. There is already a commitment in place to deploy some $13 billion over the next few years. Although AlpInvest currently invests largely on behalf of two big Dutch pensions, APG and PGGM, it is likely that its fund of funds platform will be used to create a suite of new products targeting investors that Carlyle hasn’t yet reached, such as high-net-worth clients and smaller investors who prefer the diversification offered by funds of funds, sometimes called “co-mingled” vehicles.

Although AlpInvest is best known as a limited partner, it is also among the largest direct investors in the market. Its direct program was ranked 42nd among all private equity firms, according to last year’s PEI 300 ranking. This is an important line of business as institutional investors become increasingly interested in direct and co-investments. As the manager of dozens of limited partnerships, Carlyle knows better than any firm about the enormous appetite that limited partners today have to bypass funds and invest directly in deals. With AlpInvest, the firm will have a very credible way of capturing this demand.

The acquisition will naturally draw comparisons to The Blackstone Group, which has a $30 billion fund of hedge funds business. The diversity of revenue that co-mingled investment programs such as this bring to the lumpier private equity-style businesses is great for a publicly traded company that needs to report quarterly earnings. But Carlyle will not be competing with Blackstone in the fund of funds business, at least not yet. AlpInvest is focused exclusively on private equity and mezzanine debt investments.

(For those interested in AUM horserace statistics, the combined Carlyle/AlpInvest assets under management equal roughly $140 billion. Blackstone recently reported that it has $101.4 in fee-earning assets.)

One aspect of the deal that may not get as much attention is the incredible access to information that the Carlyle mothership will achieve. The global collection of Carlyle funds already have stakes in business of all sizes and flavors around the world, giving the firm a powerful way to track economic and business trends. With the addition of AlpInvest, Carlyle will have access to more than 460 general partner relationships, all of which have their own portfolio investments scattered across the planet. If Carlyle can exploit this, it will be able to take the temperature of just about any industry in any country, and use that intelligence for itself or share it with investors as a form of relationship-building.

Through these hundreds of GP relationships, Carlyle will also have the names and numbers of just about every person and organization in the world that invests in private partnerships. It will be able to better spot investor-demand trends that will aid in the creation of the next generation of Carlyle products.

There are a few business lines that Carlyle still lacks. It has in the past tried its hand at direct and indirect hedge fund investing, but these efforts were shuttered (however it recently took a stake in a credit-opportunity hedge fund). It has not gone the Kohlberg Kravis Roberts route of building its own capital-markets advisory business. And believe it or not, there are still a few regions of the world where Carlyle does not have a presence.

But these will be described as opportunities for growth as the firm prepares to sell itself to the public, perhaps the only class of investor that hasn’t yet had an opportunity to buy a Carlyle product.